Market Overview

Bank Earnings, Key Economic Data In Focus, But Rally on Pause After France Attack

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U.S. investors have a host of earnings and data to digest on Friday, but Thursday’s terror attack in France casts a shadow on the trading day. Thoughts and prayers are with the victims and their families.

Stocks in Europe fell early Friday after the attack, with French stocks taking the biggest hit, especially stocks of companies in the travel and leisure industry. But in general, losses weren’t dramatic, and it’s worth noting that other recent terrorist attacks over the last year in Europe didn’t seem to have long-term effects on stock prices. Sadly, these tragedies seem to get almost taken for granted these days by the markets.

Here in the U.S., the day is packed with retail sales, the consumer price index, Michigan sentiment and quarterly reports from Citigroup Inc (NYSE: C) and Wells Fargo & Co (NYSE: WFC). Citigroup kicked off the busy day, reporting earnings of $1.24 per share vs. consensus of $1.10. Revenue of $17.548 billion was roughly in line with estimates. Like JP Morgan Chae & Co (NYSE: JPM), which reported strong results on Thursday, Citigroup said loan activity was strong during the quarter.

Robust loan activity from Citigroup and JP Morgan is an important indicator, because it likely means people still believe their jobs are going well, and they have more confidence in the economy. WFC is more reliant on mortgages than JPM for a lot of its earnings, so it’s important to dig into WFC’s mortgage results and what they say about the loan market. Citi has a large credit card business, as well as a widespread international business, so watch for what the company says about international operations amid the recent global turmoil.

Wells Fargo reported earnings per share of $1.01, in line with consensus. Revenue of $22.16 billion was also close to analysts’ estimates.

One area where the banks are exceeding expectations is in trading volume. That’s something that hasn’t been seen in a while, and it could mean things in general are better than people think they are. Based on what JP Morgan’s executives said on their call Thursday, there’s a sense that the economy isn’t that bad. It may not be where we would like it to be, but perhaps it’s not as bad as people think.

For a while, smaller-cap names had been leading the market, especially in the financial sector, but now large caps are doing better, so that’s a bit of a reversal and worth noting.

U.S. consumer price index (CPI) data for June was at 0.2%, below expectations for 0.3%. That came after higher-than-expected producer price inflation (PPI) reported Thursday. The Fed has said it would like to see inflation get closer to its target levels, but Friday’s CPI doesn’t seem to point toward that.

U.S. June retail sales came in strong at 0.6%, above expectations, but May retail sales were revised down to 0.2% from the previous 0.5%.

Overseas, there was positive news out of China, as its economy beat estimates with a 6.7 percent year-over-year expansion in the three months through June. Analysts say stimulus measures from the government and the central bank helped shore up demand. Growth was within the range of 6.5% to 7% that the Chinese government set as a goal for the year, but below what its economy was doing a few years ago. As earnings season continues, U.S. companies with major markets in China, for instance, agricultural equipment companies, may give investors further perspective on how China’s economy is performing.

In a speech Thursday, Atlanta Fed President Dennis Lockhart said Brexit and uncertainty require the Fed to be patient in normalizing rates, according to media reports. Kansas City Fed President Esther George said in another speech the U.S. economy has been "relatively resilient."

Remember when volatility soared two weeks ago after the Brexit vote? Well, it appears volatility has left for a summer holiday, as the VIX index fell to 11-month lows below 13 early Friday.

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JP Morgan Likes U.S. Economy: Though the Brexit vote may have loomed at the top of some investors’ minds Thursday when JP Morgan reported earnings, the bank’s executives seemed more excited to talk about the U.S. economy. And they like what they see. "We had broad-based demand for loans pretty much across categories," Chief Financial Officer Marianne Lake said on a conference call with journalists, Reuters reported. "I would say that speaks well for the U.S. economy." Lake added that JPMorgan would be at the higher end of management's forecast for 2016 loan growth. Lake noted that low rates have sparked "robust" demand for new loans, which will help boost net interest income and keep net interest margins stable through the end of the year. As for Brexit, JP Morgan executives downplayed its potential effect on the business. But there’s little doubt it had an impact on the company’s trading volumes, which soared ahead of the late June vote. Trading volumes are “fine” early in Q3, Lake said, but many analysts expect volume to slow due to seasonal factors.

1999 Nostalgia: Tech sector IPOs reached their all-time peak back in 1999, with about 300 priced that year. So far, 2016 has been a rather light year for tech IPOs with just five so far, but the market got a jolt of excitement Thursday as shares of the popular messaging app operator Line (LN) opened for trading with a 30% jump to $42 early on, making it the biggest tech IPO of the year. At its highs for the day, the company was valued at more than $9 billion. Line has said it's seeking to raise the cash in order to "enhance its strong position in Asia and to continue a more active global expansion,” according to a recent CNN Money report. But it’s up against some tough competitors, like Facebook Inc (NASDAQ: FB) WhatsApp and Tencent's (TCEHY) WeChat. The company has 218 million users, mostly in Asia. Its challenge is to expand into other markets outside of its core, analysts say.

Transports Climb As Airlines Begin Reporting: We’re entering the heart of airline earnings season, and Delta Air Lines, Inc (NYSE: DAL) was number one on the runway, reporting a better than expected Q2 bottom line early Thursday but missing analysts’ revenue expectations. Delta, like the rest of the sector, faces a triple-barrel threat from geopolitical concerns including terrorist attacks and the Brexit vote, a stronger dollar, and rising fuel costs. With all that in mind, Delta said it’s decided to reduce its U.S.-U.K. capacity this coming winter. The revenue environment “remains challenging,” the airline said in its earnings press release, and the company remains under pressure to increase unit revenue, the same issue analysts cited back in Q1. But it predicts it will achieve positive revenue per seat mile by later this year, which could explain the stock’s strength Thursday, as well as broader strength across the transports sector. Another key transport company, CSX Corporation (NASDAQ: CSX), has been soaring since reporting earnings Wednesday and giving a favorable outlook on freight trends. Next up? United Continental Holdings Inc (NYSE: UAL) reports after Tuesday’s close. More major airlines report later next week.

 

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